Drill down in the details for 2013 OCTG outlook

Demand for oil country tubular goods (OCTG) in the United States was poised to improve at the close of 2012, although the sector could be off to a slow start after the New Year, according to some industry observers.

Low natural gas prices, high levels of OCTG imports and increased domestic capacity were all cited as headwinds by market players. But improvements in natural gas prices, natural gas drilling activity and, thus, OCTG demand--in addition to the potential filing of a long-rumored dumping case against South Korea and perhaps other overseas OCTG suppliers to the U.S. market--could bring a turnaround, sources said.

Nobody is drilling for natural gas right now. Suggesting that, they will almost sounds crazy. But by the end of (2013) we may see some (natural gas drilling), Pipe Logix Inc. manager Kurt Minnich told AMM.

Minnich predicts that natural gas drilling, which has fallen sharply along with natural gas prices, could reverse course as companies drill both to hold onto leases and as gas prices crawl above a threshold that could make some gas wells economical again. Others predict that continued economic recovery and resulting increased demand from manufacturing, as well as indirect demand related to an improvement in the U.S. housing market, also could benefit natural gas prices.

But while OCTG demand may hold up, OCTG prices could remain under pressure well into the second quarter of 2013, Minnich and others cautioned.

One factor keeping a lid on prices is increased domestic capacity. Data compiled by AMM indicate that more than 3.5 million tons of potential OCTG capacity have been or will be added to the U.S. marketplace. That number is only a rough estimate, because some projects--such as Tenaris SAs 650,000-ton-per-year seamless mill, which is likely to be built in Texas or Louisiana--arent expected to begin supplying the market until 2016. And others--such as Evraz Inc. North Americas capacity expansion at its Portland, Ore., facility--arent entirely devoted to OCTG but include nonenergy products, such as structural tubing.

Other capacity increases are on a much smaller scale. TMK Ipsco, Downers Grove, Ill., for example, has boosted seamless tubular capacity at it Ambridge, Pa., facility by 35,000 tons per year and welded tubular capacity at its Wilder, Ky., operation by 20,000 tons per year, a company spokesman said. Our investments are focused on incrementally increasing capacity and on improving our processes ... to meet the growing demand for more and more value-added products and processing, he said, noting that the company also is looking to boost heat-treating and premium connections capacity. He declined to specify how much of the additional pipe-making capacity might be devoted to OCTG and how much to other products, such as line pipe.

Chicago-based Evraz NA, Vancouver, Wash.-based Northwest Pipe Co., which retooled its Bossier City, La., facility to make energy tubulars, and JMC Steel Group Inc., Chicago, which acquired the former Lakeside Steel and its new facilities in Thomasville, Ala., all declined to provide specific OCTG capacity figures, so AMM relied on company releases, public statements by executives during conference calls and its own archives to arrive at estimates, particularly on the welded side of the equation, where some sources expressed the most concern about possible overcapacity.

Some suggested that new OCTG capacity will be in a range of about 2 million to 2.5 million tons per year, while others believe the number might be higher, especially given capacity additions on the welded side that might not be as big as any one seamless project but amount to significant tonnages when added together. Whatever the exact number may be, new OCTG capacity in a range of 2 million to 3 million tons would represent a huge gain in domestic production capabilities.

This is a market that has strong demand. But that demand has been very aggressively anticipated over the last couple of years. And the result is you have capacity coming to meet, if not exceed, that demand over the next couple of years, which will probably put a cap on margins, Bank of America Merrill Lynch analyst Timna Tanners said. Existing producers will have to keep on their toes to be able to stay competitive as they face the prospect of seeing their margins squeezed.

The figures on current domestic OCTG shipments vs. new capacity indeed suggest that additional production capabilities could see the United States amply able to supply its own OCTG requirements, even in an environment of strong OCTG demand.

Domestic mills shipped a total of about 2.6 million tons of OCTG in 2011, according to statistics from the Washington-based American Iron and Steel Institute, and shipments through the first nine months of last year, the latest data available, were around 2.1 million tons, a pace that would put the 2012 total on par or slightly below 2011.

Those shipments account for roughly half of apparent U.S. OCTG demand, with imports taking the other half. The United States imported 2.9 million tons of OCTG in 2011, according to data compiled by McKees Rocks, Pa.-based SteelFacts. Imports totaled around 3.56 million tons last year, according to data from the Commerce Departments Import Administration. In both years, South Korea was the leading overseas supplier of OCTG to the United States.

The big question, some market sources said, is what would happen if new domestic capacity were to collide with current import volumes.

It looks like a dumping suit against South Korea will be filed sometime in the first quarter, a trader source said, echoing the sentiment of others market sources and, to some extent, comments made by mill executives during earnings conference calls. Without that dumping suit, its going to be a bloodbath. There is no question about that.

But regardless of what happens on the trade front, new mills likely will have an advantage over existing facilities when it comes to efficiency, market sources said. They also may be willing to dazzle potential customers with lower prices as they fight to gain market share, Minnich said. It will be hard on the older mills to fight the price when the only thing they have to work with is that thin margin between material cost and what the market will bear.

And while Minnich and other sources generally expressed optimism about the OCTG market heading into late 2013 and beyond, they also warned that any number of wild cards--including political wrangling over the debt ceiling--could throw a wrench into the entire market.

If someone spits recession into the mix, then its all for naught, Minnich said. That is obviously the one (factor) that can make our forecasts and expectations look meaningless.

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